I’ve been going back over my notes from the PMI Global Congress EMEA which was in London earlier this year and I realised I hadn’t written anything about Olivier Lazar’s presentation on budgeting and risk. I wasn’t sure what to expect but he raised some good points about ensuring your project budget accurately reflected potential issues and gave tips on how to do that.
He talked about the project budget structure as one that acted as an early warning system, integrating cost, scope and risk.
“Everything starts with an estimate,” he said. “An estimate is a risk.”
The truth about estimating
Estimating, Olivier explained:
“You fail it you have to react,” he said. “Project management is an activity of anticipation.”
Having said that, you can’t anticipate events in the future – unless your crystal ball works better than mine – but you can put mechanisms in place to maximise the opportunity to anticipate and avoid the wilful blindness that was discussed in other presentations during the conference.
Use your plan as a baseline
We all know that what you plan isn’t going to happen exactly as you had scheduled. Olivier said that we should consider the project plan as a baseline, not a map; a speedometer, not the GPS.
Usually, he went on, projects go over time and over budget because risk has not been adequately taken into account.
Therefore it’s important to plan the risk response as early as you can, because this helps you work out the cost. Risk response budgets can then be included in your budget, lowering the likelihood that you’ll go over your planned spending.
He recommended grouping risks together then identifying common response strategies, with a minimum of 3% contingency. You’ll want to increase the contingency reserves in these situations:
These circumstances reduce your ability to accurately identify the risk and so push the contingency up. Where you have low levels of uncertainty and ambiguity you can thoroughly identify risks (for example, in projects where you’ve done the same thing before) and thus be able to reduce the contingency reserves accordingly.
When you have identified risks (or threats) that have a high probability of occurrence, Oliver suggested integrating these fully into the project plan and identifying the opposite opportunity – the one that you could enhance or exploit.
Monitoring as you go
If 30% of your budget at completion has been used and yet 80% of your risk response budget is used up then you have a problem.
These figures show that a lot of things you thought were uncertain have actually happened – no one expects every single risk to really happen on their project because they are only risks, not certainties. If you merge your budget at completion, contingency reserves and risk budget together you might not be able to identify this situation as early. You’ll lose control and you can’t know what is happening because risk and contingency, Olivier explained, are not the same thing. Your risk and contingency budgets do not inflate your project budget (or reduce it, for that matter). They only give you more control.
If you are in this position then you need to act quickly to get your project back on track.
Review the scope statement and – while acting quickly – also take the time to react and review. Currently you are within budget so you may not have some of the triggers that you would expect, but consider this tracking your early warning sign.
Olivier concluded by saying that additional control lets you “move from panic and chaos to project management” and reiterated the idea of project management plan as the overall map for y our journey, not the step-by-step walking guide.
Have you split out risk and contingency budgets on your projects? I’d like to know what you think of this practice, so let me know in the comments.
Over the years I have interviewed some great project management experts on this blog. Today I want to round up eight of my favourite expert interviews. They are all packed with tips to help you manage the difficult times on your projects. Enjoy!
Jason Westland on budget management processes
“Projects with a high level of risk require more contingency funding. Having said that, some parts of the project may be riskier than others, so consider whether you add contingency to the overall budget pot or to particular tasks or phases. You could, of course, do both, if you are particularly risk adverse.”
Kevin Baker on improving project management culture
“Unified Planning takes the schedule status and the cost status at work package level and then aggregates this up to give the overall picture at total project level, that is the status for the complete aircraft development.”
Wilhelm Kross on risk management
“Making trade-offs, designing short-term compromises, implementing short-term work-arounds and the like, are typical management challenges that seem to be ignored.”
And there's another part of my conversation with him here.
Eric Winquist on reusing requirements
“Organizations that centrally manage requirements respond to change faster and catch errors earlier because they are leveraging requirements that have already been developed and tested.”
Chris Bell on Enterprise Risk Management
“ERM is a scalable, holistic approach to risk management that consolidates and organizes risk information from across the organization into one location so that it may be used for improved decision making. By embracing ERM and creating a risk management culture, organizations can drive business performance, innovation and growth, while protecting company reputation and shareholder value.”
Jon Swain on project management tools
“With everything in one place, senior management can see up-to-date project performance data across the whole organization allowing them to better manage their project portfolios. They can proactively choose which projects to select, prioritize projects particularly with competing or scarce resources, understand the interactions between projects and tie all of these decisions directly back to the company's strategy and goals.”
Todd Williams on cost audits
“When you are determining the cost of internal resources, you need to determine they are performing to expected goals. Are they spending time on non-project tasks or inefficiently getting toward deliverables? They may be salaried and simply billed to your project. In this case you need to be diligent ensuring hours (which translate to money) are spent on completing their work and that these hours are in compliance with industry standards. If time gets excessive you have a problem.”
Rob Prinzo on securing funding for your projects
“Robust budgeting starts with comprehensive requirements. I recommend starting by making a list of all your projects, categorizing the projects based on: size, business function, type, level of funding, effort and organizational impact. Next, determine the dependencies with other projects, funding, resources and business decisions. Once you have your list, categories and dependencies you can start to determine the projected costs for the projects.”
There is a lot of jargon around project cost management – personally I think it is one of the areas of project management most laden with new terms to learn. Here are 20 budgeting and financial management terms that you need to know.
Predicting future expenditure based on what has happened in the past or what you know about. Reforecasting is when you take your last forecast and tweak it now that you have new information.
Contingency is the provision you make for anything you don’t know enough about yet within your budget. It is supposed to address a particular risk, like the fact you haven’t got full cost estimates for the delivery piece of work that you’ll be doing. It is often added on to the budget as 10% of the total budget amount before tax in order to give you a cushion if something unexpected happens.
3. Management Reserve
Like contingency but different. It’s a pot of money put aside to deal with the unexpected impact of problems arising from missing deadlines or other objectives.
A range within which you can deliver your project without having to go back and ask for your sponsor’s approval. This is helpful because a project will never cost exactly what you have budgeted. Let’s say your detailed estimate is £1503.23. Your tolerance on that piece of work could be the range £1500 to 1550 because you and your sponsor acknowledge that within that range the difference is insignificant and no further approvals are required.
Money to be spent on capital assets e.g. physical things like a printer for the office.
6. Operating Expense
Money to be spent on items that keep the project running e.g. paying for a contractor.
The actual amount of money spent on a task, activity, phase or project. People talk about ‘Actuals’ in comparison to ‘forecasts’.
Use like this: “We forecasted $100 but the actual was $76.”
I could write a lot about how I’ve been caught out with accruals in the past. Accruals are an accounting procedure where the expenditure is recognised when it is incurred, even if you don’t yet have the goods and regardless of when the money leaves the bank. Most important at the end of an accounting period so you don’t forget to let the finance team that you have received the goods but not yet had the invoice.
The amount of money you have to deliver your project.
The way you account for expenses incurred on your project.
Use like this: “We’ll be charging 25 hours for the work done in August.”
A guess at how much an item or task will cost. It should be the most educated guess possible as the impact of getting it wrong can be significant! There are estimating techniques to help take the guesswork out of calculating estimates.
12. Sunk Cost
Costs already incurred on your project that you can’t get back. Most relevant when talking about whether or not you should close down a project. You won’t be able to recoup the sunk costs if a project is closed.
13. Opportunity Cost
Often used as a way of selecting which project to do. It works out the return that would have been earned if you went ahead with one activity over another. For example, if you choose to do Project A and not Project B, and Project B offered a return of €60k, then your opportunity cost is €60k.
14. Cost Benefit Analysis
A way of working out how much benefit you get for your investment. Cost Benefit Analysis is a tool used in project selection. It gives you information about whether the project is financially viable and whether it is worth pursuing or not. It’s a simple calculation that looks at whether the benefit you are going to get outweighs the cost of getting it.
15. Payback Period
The payback period of a project helps you understand whether you get a return quickly enough for the project to be worth doing. Find out more in this video: Understanding Payback Period
ROI stands for return on investment. It’s a way of calculating whether a project is worth doing or not. This video explains more: ROI Explained: A Video
17. Cost Aggregation
Basically just adding up all the individual costs on your projects to work out the overall cost of doing something.
Your level of accuracy will be specified in your cost management plan. It relates to what rounding is used in your estimates. An accurate measure is one very close to the actual measure.
Precision is different from accuracy. The level of precision you are going for will also be specified in your project cost management plan. Precision means that when you look at a range of figures they are close to each other.
Use like this: “Precision range for this budget item is +/-1%.”
Actually, if you’ve got a great way to explain the difference between accuracy and precision then let me know in the comments below, because it is tricky to get your head around.
Finally, EMV. This video explains what expected monetary value is all about.
What did I leave out? Leave your additional essential cost management terms in the comments below!
…At least, that’s what a survey by ESI would have you believe.
The funding for PMOs has historically been a bit iffy. That’s not a technical term, by the way. PMOs have struggled to prove their value and there is a cyclic effect when times are hard in business: PMOs start to lose their funding and get scaled back or cut completely. That, according to ESI, is finally changing.
The study of over 900 respondents held earlier this year reports that 49% of PMOs are funded as a corporate overhead. Even the word ‘overhead’ doesn’t do the PMO any favours. I know PMOs aren’t exactly revenue generating but they should be a governance and cost control centre rather than a bottomless black hole of overheads. In fact, where a project is done for a client, and a PMO is part of the deal, 40% of them are funded by the project. So you could argue that the PMO is a revenue centre in those situations. However, the study does not make it clear whether those costs are passed to the client or not. I digress…
Corporate i.e. central funding is a good thing for PMOs. ESI believes that corporately-funded PMOs have a far greater opportunity to mature and to provide a wider range of benefits and services both to projects and the business as a whole.
Funding increases on the way
Enterprise PMOs are optimistic. The report concludes that around 30% of enterprise PMOs thought they would be seeing increased funding in the next financial year, so they must think they are doing a good enough job, growing enough and gaining enough recognition to be worth the extra investment. The ESI pundits report that enterprise PMOs typically have a wider influence and higher visibility than those PMOs set up to support an individual project or programme.
PMOs that are supporting individual initiatives are less optimistic about their future and their funding. This is hardly surprising: if your department has been set up to support a project and then that project finishes, your future is uncertain. You can foresee the end of the project from Day 1 so it is no shock that project level PMOs are a bit more reticent about their future.
The challenge of resource management
Another interesting statistic from the ESI study is that resource management is perceived to be the thing that the PMO is worst at by the people who actually do the job.
About half of respondents reported that their PMO has been ‘very ineffective’, ‘ineffective’ or ‘neither effective nor ineffective’ at resource management across projects and programmes.
This is a shame (and a surprise). I thought one of the main benefits of a PMO was to handle resource management and make sure that the right people were working on the right projects at the right time. They certainly have the tools and the remit to do that, if they want. Resource management is tough because it’s probably the part of project planning that deals with the vagaries of your people more than any other. There are just so many variables and things that might change. Keeping track of who is doing what when is more than a full-time job and relies heavily on the support and input from the team members themselves. Plus more and more of what project managers do is knowledge work which makes it very difficult to estimate. This is going to continue to be a challenge for project managers and PMOs.
Another resourcing point flagged by the study is the lack of access to team members trained in Agile working practices. More and more teams are adopting Agile but the training and change management aspects of embedding this in the organisation seem to be lagging behind.
And the challenge of recognition
The survey invited participants to say what other people thought the PMO struggled with as well as giving their own assessment. Inability to effectively manage resources was not something that made the top list of reasons why people challenged the PMO.
The main reason for ‘challenging’ (for which I would read ‘complaining about’) the PMO was about the value that it added to the organisation. In other words, people saying that it didn’t add any value to the business. That’s not really a surprise. Executives have struggled to see the value of the PMO for some time and it’s only when you have a programme of quick wins and a high profile about the work that you do that the value of a PMO is clear. And even then you won’t always win over the detractors. There will always be someone who says project managers should just get on with it.
PMOs provide a valuable role within a company and the regular ESI studies show the changing landscape of the global PMO. It will be interesting to see if we are still hearing the same complaints and complements about PMOs in a few years.
In this video I discuss the 6 tools and techniques related to project cost control.